Stockbroker and Chap 7 -odd situation

[brokerealest]

My wife and I filed a chapter 13 last year as we still had some equity in our home we were trying to protect it.

My wife has a investment advisory business and one of her creditors challenged us under the stockbroker rule. (which says stockbrokers may not file a chap 11, 13). The judge agreed and dismissed us.

Fast forward to today, we have no more equity in the house and filed a chapter 7. The US gov't trustee said no, we need to be in a 13.

Taking a shot in the dark here, but does anyone know if we are screwed or will a bk court agree with us since we have no other option for relief?

[Sham11801]

Do you want to share with us why you aren't qualifying for a chapter 7? Was the 13 voluntary to protect the equity in the house originally, or that you didnt qualify even for a 7 then?

[brokerealest]

Sorry, Yes we were trying to protect the equity in the house. Our lawyer lowered some of our expenses to make sure we didn't pass the means test so we could file a 13.

We converted to a 7 after the dismissal since the value of our home declined enough so that it would be covered by our state's exemptions.

The trustee has filed for presumption of abuse. He is telling us that since we has positive cash flow under our 13 that we can't file a 7. We updated our paperwork to show actual expenses so that we can pass the means test, but the trustee keeps bringing up the old chap 13 schedule and says "if you could cut back expenses before, why can't we do it again"

We have over 200K in debt - mostly medical. My lawyer is not sure what to do and has been consulting with other lawyers. Some have said the trustee can't do this since we are not allowed to file under any other chapter, and other have no idea!

[davephx]

Does your wife as an RIA hold customer assets?

The term stockbroker seems very misleading. Clearly it is designed for client account liquidation situations under SIPIC. It seems to only apply against a broker-dealer or someone who has custody of client funds.

There is an extensive review of this at

http://www.wilmerhale.com/publications/whPubsDetail.aspx?publication=8469

It is very confusing but the whole point of the stockbroker section seems clearly to be about protecting brokerage or advisory accounts.

If you do not hold customer assets the intent of the section does not seem to apply.

[brokerealest]

Yes, she is set up as a RIA and uses a firm to custody assets. Our understanding was the same, that this rule was for protecting the customer when their assets were involved. (which was our argument as well)

The creditor who was challenging us was a brokerage firm my wife was working at a few years ago. They sued her for taking clients and she settled.

Since (at the the time) we had some equity in our house, her old firm wanted us to be forced into liquidation so they could get at the assets.

Her old firm came at us with various cases that showed firms set up in a similar fashion as my wife (RIA using a custodian). There main argument was that even though the rule seems to have been created to protect clients, that the rule states no stockbroker may file for chap 13, even if it is just for personal debts. The NOLO guide also says this. So the judge said we can't do a 13.

So my question is - if anyone knows because I can't find anything - is if we can only file a chapter 7 should we be able to proceed?

[davephx]

Wow, this is a mess. In most legal cases I think something not the legislative intent could be challenged.

Probably problem is the broker-dealer was sharp enough to argue that well most other creditors would probably not raise the objection.....

Was your wife fee based related to the RIA or was she placing orders for RIA clients acting as a registered rep of a broker-dealer? Seems clear she was a Reg Rep of old broker-dealer. Also usually RIA's are set up as separate corporations not personal.

The key issue as I see it is whether she is "effecting" transactions in securities since that is the key to the definition of stockbroker.

I found under some state securities laws its the broker-dealer that "effects" securities and specificallly not the Agent. But there is also SEC cases that hurt. But the clear intent of the Bankrupcy provision is related to safety of customer accounts which only relates to the broker-dealer (or might apply to the RIA without a broker-dealer)

I realize Wikipedia is not the last word in legal definitions but this does help:
From Wikipedia
A broker is a party that mediates between a buyer and a seller. A broker who also acts as a seller or as a buyer becomes a principal party to the deal. Distinguish agent: one who acts on behalf of a principal. A "brokerage" or a "brokerage firm" is a business that acts as a broker. A brokerage firm is a business that specializes in trading stocks. A sales person working for a securities or commodity brokerage firm is popularly (but incorrectly) called a "broker." A broker in that context is, strictly speaking, an exchange member who is actually executing the purchase or sales order in the 'pit', on the exchange, as a service to the client of the firm for which that salesman works.

Here is other perhaps useful arguments to a Court:
Although a rare circumstance, it should be noted that a stock broker or commodity broker is not eligible for relief under Chapter 13. According to the legislative history, the reason for this exclusion is to prevent stock brokers and commodity brokers from avoiding the customer protection provisions of Chapter 7, and particularly, Subchapter III of that chapter which pertains particularly to stock broker liquidation and Subchapter IV which deals with commodity broker liquidation. The specific definition of who is a "stock broker" is found at 11 U.S.C. Section 101(53 A) while the definition of a "commodity broker" is found in sub paragraph (6) of that section. Source http://www.paulpost.com/services/bankruptcy/ch13.html

Broker definition from investorwords.com:
An individual or firm which acts as an intermediary between a buyer and seller.
( An agent/registered resp does not act as an intermediary only places the order with the broker-dealer who via the stock exchage via a market maker acts as the intermediary.) Agents/registered reps have no contact with other side of the transaction and have no part in the execution, the broker-dealer does.

Another definition:
Broker
An individual who is paid a commission for executing customer orders. Either a floor broker who executes orders on the floor of the exchange, or an upstairs broker who handles retail customers and their orders. Also, person who acts as an intermediary between a buyer and seller, usually charging a commission. A "broker" who specializes in stocks, bonds, commodities, or options acts as an agent and must be registered with the exchange where the securities are traded. Antithesis of dealer. Source: Financial Dictionary
(A registered rep or an RIA does not register with the exchanges since they do not act as a broker - registered reps are registered as agents not brokers and are licensed by FINRA.)

Also: Stockbrokers buy and sell shares in corporations and deal in corporation stock and in other Securities. A stockbroker's functions are generally broader than those of other brokers. As more than a mere negotiator, he or she makes a purchase in his or her own name and ordinarily pays the purchase price. A stockbroker is often responsible for the possession of the securities with which he or she deals.
( Again a registered rep does not purchase in their own name and does not take possession)

Under the Bankrupcy Code:
(53A) The term "stockbroker" means person--
(A) with respect to which there is a customer, as defined in section 741 of this title; and
(B) that is engaged in the business of effecting transactions in securities--
(i) for the account of others; or
(ii) with members of the general public, from or for such person's own account.

Under many State Securities laws it is the "broker-dealer" not the agent that is in the business of "effecting" transactions in securities:
For example Delaware:
(3) "Broker-dealer" means any person engaged in the business of effecting transactions in securities for the account of others or for his or her own account. "Broker-dealer" does not include:
a. An agent;
Source: http://attorneygeneral.delaware.gov/...act/7302.shtml

Or in Minnesota exactly the same:
Subd. 4. Broker-dealer. "Broker-dealer" means any person engaged in the business of effecting transactions in securities for the account of others or for that person's own account. "Broker-dealer" does not include:
(1) an agent;
Source: https://www.revisor.leg.state.mn.us/...1999&id=80A.14

[davephx]

In your RIA situation it seems the most important point is if the custodial accounts are in the customers name not yours. That is the usual case ... other than Madoff!

If so:
Note also in the link in my first post to the Wilmerhale.com law firm they also say:
The same law firm (wilmerhale) also says:
Why are stockbroker liquidations unique? Stockbroker liquidations are unique because, in addition to holding their own assets, stockbrokers hold assets for their customers, including cash and securities. Unlike non-broker liquidations, where most of the assets being liquidated belong to the debtor, stockbroker liquidations involve the liquidation both of the broker's assets and property specifically allocable to customers and customer investments. Customers of brokers have priority rights in such property in a stockbroker liquidation. Similar priority rights do not exist in non-broker liquidations.

[brokerealest]

Are you sure you're not my lawyer. Those are the same arguments we used

She is fee only right now. Let her 7 expire. The hiccup was is she has discretion over her clients money and does block trading. When she buys a block the shares are placed into her llcs account. Even though it is under the llc, as owner she is responsible for those shares until they are allocated into clients accounts.

Her old firm also presented a few cases that said even if the bd/custodian was acting as broker in reagrds to the stock exchance, the ria was effecting the transaction by have discretion over the trade.

To me it seems this rule is to protect clients if money is owed to them. Their lawyer said it was two seperate rules. And the judge agreed: stockbrokers cannot file a chap 13. And IF clients monies are invloved THEN the rules laid out on how to liquidate
under a stockbroker 7 must be followed. While the second part doesn't included us, the first part did.

My lawyer said that since the judge already dismissed us on this issue we can't fight it unless we try to appeal it. However we really don't have the money to fund a 13 at this point anyway. We are boardline 7 and 13 on the means test. So all of this is over about $100. While I am going to be forever in debt to my
lawyer.

Thank you for your help. This is a tough situation for us.

[davephx]

Thanks for sharing...

For a friend who is very concerned hopefully (for him not you sadly) its the block trading and discretion that pushed it over. He has no discretion is simply a 7 rep of a b/d. Also an RIA but all securities implementation is only done as a registered rep of the b/d.

Your unfortunate situation still would seem to be against the legislative intent since YOU (wife) do not directly own any client monies so no liquidation needed of client assets. But as you say not worth the huge legal fees to appeal.

I have a friend who is desperate to keep his home and may need Chap 13 to block a Trustee sale, although has been approved for the Home Affordability Plan trial payments.

But CitiMortgage who is the servicer for Fannie May the investor, has lost paperwork twice after being told was approved back on May 1st before any foreclosure notice was filed. He does not trust CitiMtg to call off the Trustee sale because they have screwed up so many things already. He is in the 1st month of 3 month trial period so not yet technically modified and sale date is just after the 3rd payment. He has not received all the paperwork that Citi says he should have received long ago. Treasury says can not foreclose if its in process of modification.

There is another board entry of someone who lost their home based on Citi's admitted screw ups over an appraisal and now Citi says nothing can be done except for her to move out.

If we don't get concrete evidence the Trustee sale will not take place looks like he could either pay attorney to get a Temporary Restraining Order to delay the sale or file Chap 13. The stockbroker issue would only come up I assume if a creditor challenged the Chap 13 as your wife's b/d did, but it would still stay the Trustee sale and give time to fight for modification or other options.

[brokerealest]

I spent alot of time researching this topic this weekend. It seems that if there are substantial assets and a person tries to file 13, then the stockbroker rule seems to come up. BUT it seems that it is always the creditor that brings it up and fights it.

I did see one case where a rep of AMEX was denied a 13 after AMEX came after him for the training costs. But it was AMEX who initiated the process to have the 13 dismissed. It seems that it is such a gray area when it is only personal debts. I think the trustees are not even aware of the rules and don't bring it up unless a creditor does.
A quick FINRA search and it seems that series 7 brokers have filed 13s in the past. It is the RIAs with discretion that seem to get caught up in the rule.

arrggg!!

[davephx]

Thanks for the research and input.

I am curious how you did a FINRA search without having to individually look up names of specific brokers.

I did a general Google search and found a few cases of a Rep Chap 13 mostly related to failure to disclose on Form U-4 which is a huge mistake or state securities actions against the failure to disclose.

Just wondering if you found a different way to find the reps with Chap 13's.