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First, customers’ “net equity” claims must be based on applicable law – not
“undefined considerations of equity.” Butner v. United States, 440 U.S. 48, 55-56
(1979). Accordingly, neither the Trustee nor this Court is “authorized in the name of
equity to make wholesale substitution of underlying law controlling the validity of
creditors’ entitlements.” Raleigh v. Ill. Dep’t of Revenue, 530 U.S. 15, 24-25 (2000); see
also In re Highland Superstores, Inc., 154 F.3d 573, 579 (6th Cir. 1998) (bankruptcy
court may not “sweep aside [substantive] law – in favor of general equitable principles –
in computing [a creditor’s claim]”); In re Lapiana, 909 F.2d 221, 224 (7th Cir. 1990)
(“[B]ankruptcy judges are not empowered to dissolve rights in the name of equity.”).
Second, the “cash-in/cash-out” approach discriminates among customers and
impermissibly effects a “categorical reordering of priorities that takes place at the
legislative level.” See United States v. Reorganized CF & I Fabricators of Utah, Inc.,
518 U.S. 213, 229 (1996) (holding that bankruptcy courts may not rank claims within the
class of general unsecured creditors in the name of equity). Contrary to 15 U.S.C.
§ 78fff-2(c)(1)(B), customers would not share “ratably” under the Trustee’s approach, but
would be treated differently if they are (in the Trustee’s parlance) a “net winner” or a “net
loser.” The Trustee cannot ask this Court to treat individual BLMIS customers
differently, because bankruptcy courts “are not free to adjust the legally valid claim of an
innocent party who asserts the claim in good faith merely because the court perceives that
the result is inequitable.” United States v. Noland, 517 U.S. 535, 540-41 (1996) (internal
quotation marks omitted).
Third, the Trustee’s “cash-in/cash-out” approach impermissibly elevates SIPC’s
fourth priority under 15 U.S.C. § 78fff-2(c)(1)(D) by permitting it to recover ahead of
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